UBS faces dual attack in parliament after trading loss

ZURICH Mon Sep 19, 2011 6:14pm EDT

Kweku Adoboli leaves City of London Magistrates Court in London September 16, 2011. REUTERS/Luke MacGregor

Kweku Adoboli leaves City of London Magistrates Court in London September 16, 2011.

Credit: Reuters/Luke MacGregor

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ZURICH (Reuters) - The Swiss parliament piled pressure on the nation's biggest banks on Monday in the wake of UBS AG's $2.3 billion loss from rogue trading, as a center-left party pushed for a ban on risky investment banking and a plan to raise capital requirements passed the lower house.

Social Democrat lawmaker Susanne Leutenegger Oberholzer narrowly failed to get enough support for her proposal to reopen debate on tough new capital measures for UBS and Credit Suisse so that a ban on investment banking could be added.

The plan to force the banks to hold more capital than under global rules so that they can be shielded from future crises was passed, and the Social Democrats have the option of bringing a separate piece of legislation on the proposed ban.

"What the latest debacle of UBS in London shows is that regulation must go further as fast as possible. Investment banking must be banned for systemically-important banks and proprietary trading must be massively limited," the party said in a statement.

UBS has kicked off an internal investigation into the catastrophic failure of its risk systems that led to the equity trading loss, which was discovered last week.

UBS said its board of directors had set up a committee chaired by independent director David Sidwell, former chief financial officer at Morgan Stanley, to conduct a probe into the trades and the bank's control systems.

"External expectations are that the investigation should take weeks and not months," a UBS insider told Reuters. "The internal investigation will be coordinating with the regulators on their probe."

London trader Kweku Adoboli was charged on Friday with fraud and false accounting dating back to 2008.

CAPITAL HIT

UBS said on Sunday it remains one of the world's best capitalized banks, even though the $2.3 billion loss had set it back in its efforts to build up its capital to meet new regulatory requirements.

In Britain, where similar reforms to separate risky investment banking from commercial banking are in the works, Business Secretary Vince Cable said the UBS scandal illustrated the need for change.

"If there were any doubts about the need for radical reform, the UBS rogue trader has dispelled them," Cable told delegates at his Liberal Democrat party's conference.

The Swiss parliament rejected the bid to reopen the debate so that an investment banking ban could be discussed by 55 to 42 with six abstentions.

The loss is a heavy blow to the reputation of Switzerland's biggest bank, which had just started to recover after its near collapse during the financial crisis and a damaging U.S. investigation into its aiding wealthy Americans to dodge taxes.

Chief Executive Oswald Gruebel, brought out of retirement in 2009 to turn the bank around, said the alleged fraud would have consequences for strategy and possibly also for himself.

The UBS source said there was no indication that others were involved in the affair, and the global synthetic equities team in which Adoboli worked was still operating, but added that members of the team would have to stop trading while answering questions as part of the investigation.

UBS shares closed down 1.9 percent at 10.07 francs, but still outperformed a 3.4 percent slide on the European banking stocks index, as traders noted the stock had already fallen sharply after last week's news.

ANGRY BANKERS

UBS is now widely expected by analysts to speed up an overhaul of its investment bank that had been planned for announcement on November 17, though big shareholders have signaled they could wait until that date while the bank completes its internal investigation, according to the inside source.

An investment manager whose company holds shares in UBS said he had detected anger within UBS's private banking operations at the turn of events. "I talked to several senior private bankers, and one told me how he spent last week with compliance arguing about a 1,500-franc accounting difference ... And then some junior investment banking trader loses 2 billion.

"It creates serious ill will among their clients. So internally there will be some momentum to resize IB."

Along with Gruebel, Carsten Kengeter, head of the investment banking unit, may be in the firing line. "We estimate that the investment banking chief Carsten Kengeter ... will be sacrificed after this scandal," said analyst Dirk Becker at broker Kepler.

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Comments (1)
singularityai wrote:
UBS London, and Stamford HQ in the U.S.,appear as risk management failures that could undermine a Bank that once had a Triple AAA rating.
To simplify this significant issue as wanton rogue trading must be analyzed from several perspectives:

1.Who is monitoring the capital of the firm and allocated capital to individual traders ? Where is there system of capital controls that would highlight and trigger regulatory rules and regulations.

2.The Manager of any proprietary trading unit is often too focused on the profit realization,without understanding the implications of fictional trades; he or she should be demanding a risk management system that insures that the Unit Chief, CFO, and CEO are quite aware of capital allocation to traders.Compliance and risk management cannot be considered minor Departments in the current trading environment of complex instruments barely understood by those who must analyse their true profit or loss.

3. Every trade has an offset, and the implication of fictional hedges, probably with extended settlements,opens up a serious question of who is verifying the offsets to these fictional trades. It is common to send out a trade execution or confirm to the contra-party, fictional or not,and upon not receiving a comparative confirm to the fictional hedge, should have set off all the bells and whistles, unless the trader was in conspirancy with another trader at another firm; this is certainly possible given the current environment for max profits.

Sep 19, 2011 7:54am EDT  --  Report as abuse
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